Why Planet Labs Stock Climbed 15.8% In March

Shares of Planet Labs (NYSE: PL) were up 15.8% in March, according to data from S&P Global Market Intelligence. The company operates a fleet of satellites that regularly capture images of Earth and sells the service for both commercial and government purposes. Investors have gotten ultra-bullish on the company over the past year, with the stock up nearly 1,000% in the last 12 months alone.

Here's why Planet Labs stock was rising once again this week, and whether you should consider adding it to your portfolio.

A rapidly growing backlog

Planet Labs released its Q4 earnings in March, putting up stellar growth once again. Revenue grew 41% year over year to $87 million, while generating full-year free cash flow of $53 million, demonstrating the sustainability of its innovative orbital imaging service model.

More importantly, Planet Labs grew its backlog 79% year over year to $900 million in the quarter. This will help it grow revenue for years to come from long-term contracts such as the $100 million+ deal it signed with the Swedish government.

The company keeps pushing the edge by adding even more satellites to its service and improving image quality for customers. What's more, it has new partnerships with Alphabet to build data centers in space, as well as Nvidia to help with image processing and analysis. It is unclear how much will come from these projects, but the market is currently treating it as quite bullish.

Should you buy Planet Labs stock?

Planet Labs is a fascinating business. Its revenue keeps compounding, and should grow into the hundreds of millions in the years ahead due to its massive backlog. Long-term partnerships with technology giants should give it optionality as well. Plus, it has solid unit economics, with gross margins above 50%, and it generates positive free cash flow.

The problem stems from the stock's valuation. After rising more than 10x in the past year, Planet Labs currently trades at a market cap of $12.5 billion, which will be further exacerbated by a share count that keeps rising and diluting existing shareholders.

This is quite a premium to the company's trailing revenue, giving it a price-to-sales ratio (P/S) of 42. Even if Planet Labs can grow its revenue at a double-digit rate for the next decade, the stock looks wildly overvalued for investors looking to buy right now. Avoid chasing Planet Labs stock after it hit another all-time high in March.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Planet Labs PBC. The Motley Fool has a disclosure policy.